November 2006 Newsletter

One Stop Logistics Centers Running Out Of Gas

I've always championed the smaller logistics provider because of his attention to personal service, his flexibility in responding to fast changing circumstances and his 100 per cent commitment to his customer. Many in our industry, particularly the "big boys," derided my view and said the future of air cargo and the logistics industry was in the hands of the one stop logistics shopping centers. Customers supposedly would flock to those companies offering every type of forwarding activity.

Well, the big boys were wrong. The one stop logistics centers are running out of gas. Its era has ended. The selling by TNT of its logistics division and concentrating its focus on transportation, I believe, marked a sea change in how logistics companies are viewed by shippers. Few remember, but it was TNT itself who kicked off the one stop supply chain management shop back in the mid-nineties. Now, TNT has taken a closer look at its balance sheet and has seen the light. Its management realized there is little profit in being all things to all people. They want to concentrate on their most profitable division; package express. Another straw in the wind. Deutsche Post, one of the most aggressive organizations buying up companies like Airborne and Exel, is starting to divest itself of "un-needed" divisions like VfW, which it acquired along with Exel two years ago.

The reason for this reverse thinking is simple. Shippers are finding the claims are hollow of the big, one stop logistics supply chain centers. They cannot deliver on their promised services and more importantly, cannot make good on their promised reduction in costs. It is now apparent that cost savings of up to 40 per cent stated so confidently by the big logistics companies, were figments of their imaginations. Massive purchases are very difficult to swallow as almost every logistics company paying hundreds of millions and even billions of dollars can attest.

From a dollars and cents standpoint, transportation remains the dominant force within the supply chain. It is the bedrock of our business. Too many of our big brother friends have forgotten this basic truism of our business. All the ancillary bells and whistles make a lot of noise but are superfluous.

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A Few Common Sense Views On Security

Security within the air freight industry is a touchy, sensitive and complex subject. The enormous volume and diversity of the cargo itself. The enormous diversity of the people who physically place the millions of main deck and belly containers on the aircraft. There are so many issues which the government and our industry require balancing. A few of the most important; the differing security problems posed by freight traveling in the bellies of passenger aircraft vs. main deck freight on the all-cargo airlines. How much security would further harm the nation's critical balance of trade; now in the hole of about $65 billion per month. The impact of regulations on the competitiveness of U.S. flag carriers against their foreign competitors. While everyone seems to be an expert on the passenger business, very few really know the air cargo industry. The Transport Security Agency (TSA), responsible for airline passenger and cargo security, seems to be lost when it comes to the security of all the "boxes" traveling on airplanes. Despite this lack of knowledge, a blizzard of rules and regulations have been designed, in my mind, almost by whim. They seem to be more effective in making air cargo less of a viable means of transportation than securing our nation.

There are no easy answers to one of the most critical problems facing our industry. Let me suggest, however, a few commonsense answers that may start the process in developing solutions. First, we need to put together all of the finest minds in the air cargo industry itself. They must come from all segments of our business; combination airlines, all-cargo carriers, integrators, freight forwarders, customs brokers, shippers and the government itself. Once they come together, they must resist the temptation to play to the galleries, to shout each other down, put forward only the narrowest interests of their own companies and filibuster to death the subject at hand. We must impress upon them that they cannot walk away from this vital task until comprehensive, practical solutions are found. I believe it is the air cargo establishment itself who must take the lead in developing and placing into practice meaningful practical security regulations that will allow air freight to continue as an important method of transportation while not sacrificing security. Of course, we must cooperative with our's and other governments in this critical endeavor. But we must take air cargo security out of the hands of political and other special interests and place them in the hands of the people who know the industry--us!

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Will Airbus Sell At Least 420 Of Its 380s To Break Even? Will Pigs Fly?

It's easy to dump on Airbus for its mistaken decision to develop the super jumbo 380. What most airline experts (including those on Wall Street) are calling the wrong airplane at the wrong time is looming over the airline industry like a dark thundercloud. About the only people not heard from are Boeing management who are keeping a discreet silence. There is one huge falsehood, however, that cries out for rebuttal. That falsehood is Airbus' original, ridiculous assertion that only 250 airplanes would have to be sold to reach the breakeven point. The 250 figure never stood a chance even if there were no costly delays or overruns with the aircraft's production. However, with at least a two year delay and skyrocketing costs, the breakeven point is at least 420 aircraft produced and sold. And that figure assumes that compensating customers for the delay isn't so costly that Airbus ends up giving away for nothing the first four years' production. Only 150 aircraft have been sold, with even that figure looking increasingly shaky. No new orders have been recorded within the last eighteen months and none seems likely in view of the widespread, negative attention the 380 has received.

There is a lot of talk in Toulouse, home to Airbus, about management pulling out of the project completely and abandoning the airplane. Ending the project makes business sense. Airbus then can throw all of its financial and engineering resources behind its projected smaller, yet long range 350. This is the aircraft that could give Boeing a run for its money with its 787 Dreamliner. But national pride is at stake and the 380 will continue its production run at losses amounting to at least $ 4 billion. The French and German governments, original sponsors and backers of Airbus, never will allow those production lines to stop and workers to be laid off. They'll go on with it, come what may, even if it turns out to be an albatross around the company and its shareholders for years to come.

An interesting sidelight. A few customers like FedEx and UPS have ordered freighter versions of the 380. Due to production delays and the urgency to get the passenger model into the hands of customers, the 380 freighter may not be available until the year 2012. I wonder how many advanced 787-8 freighters Boeing will sell in that time?

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Julian Keeling